South and Southeast Asian economies wrestle with external risks, according to S&P report
29 August 2013
News, Asia, Global
By Asia Asset Management
As emerging Asia struggles with exiting capital and market sell-downs, are we on the verge of another financial crisis in the region? Standard & Poor's Ratings Services asks that question in a report published recently.
The report, titled "South And Southeast Asian Economies Grapple With Growth And External Financing Risks," said the market turbulence is driven largely by uncertainties around the timing of "tapering" (lowering bond purchases) by the US Federal Reserve, coincided with recent cuts in Asian GDP growth forecasts, most notably for China.
"The road may be rocky in the near term, particularly for the largest deficit countries – India and Indonesia – but we don't think this is the Asian crisis all over again," said Standard & Poor's Asia-Pacific Chief Economist Paul Gruenwald.
The financial markets appear to be in the midst of pricing in a different path for US monetary policy. During that process, we are likely to see bouts of volatility in emerging Asian economies, along with weaker currencies, lower asset prices, and subdued sentiment and growth. But, in our view, this is not a repeat of the 1997 Asian financial crisis.
"The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates. In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks," Mr. Gruenwald said.
The report discusses the two types of external macroeconomic risks that emerging Asian economies face: growth and financing. The smaller, more open, more trade-dependent economies in Asia, such as Singapore and Hong Kong, have higher growth betas, or risks to growth. In contrast, the larger, more domestically driven economies such as China, India, Indonesia, and the Philippines have lower growth betas.
"External financing risks arise from the financing mix of domestic investment and growth. The key metric here is the current account balance, which reflects not only exports less imports of goods and services but savings less investment," Mr. Gruenwald said.
Economies running a current account deficit have savings that are insufficient to finance their investment and growth, and therefore need to borrow from the rest of the world. In times of normal risk appetite, this dependency may not be a problem. However, when markets become risk averse, economies with current account deficits often find themselves facing external financing pressure.
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